And you’ll see now that we’re starting to get some outputs. In this case, we’re going to use a 70% loan to value. Cash on Cash Returns and Commercial Real Estate Valuation You might see a loan to value anywhere from geez, 80% down to 10, 20, 30%. Now, the next thing we’re going to do is figure out what our loan to value is. So I’m just going to use five and a quarter as an example, in this case. They could go up as high as five and a half, six, six and a quarter. You might see them at a low point at three, three and a half percent. For this example, I’ll put 25 years in, and I’m going to carry an interest rate of 5.25%. So typically you’re going to go to a lender and you’re going to see anywhere from a 15, 20, 25, maybe even 30 year amortization period. So here we’ve got the amortization period. And a shout-out to Mike Lipsey for turning me onto this tool, and I kind of developed my own version of it. That’s why we built the tool, because we want to get a little more accuracy for what we think the cap rate might be. You’ll say, “Ah, what are cap rates in the market?” Take the 550, multiply or divide it by 10, or 10%, or 7%, or 6%, whatever the cap rate might be that you think is the right cap rate for this property to come up with the commercial real estate value. And most of the time you’ll stop here and just put a cap rate on it. That’s a pretty quick way to get to that number, what the NOI is. That would give you an NOI, or net operating income, of $550,000. So what we do is we take the gross operating income for a property, and let’s say that your property does $750,000 a year in revenue and it costs you, say, 200,000 bucks a year to operate it. These assumptions are going to come from the debt market, your cash on cash return, and then what the NOI of the property is. So one of the things I’m going to show you today in this video is a tool that we use to develop a valuation using a cap rate that’s based off of some assumptions. Comparable cap rates are helpful, but I actually like to build my own cap rate. I get this question all the time what’s a good cap rate? Well, it’s kind of a complicated question, because most people want to know what a good cap rate is because they want to benchmark against what someone else paid using the cap rate.
#NOI CALCULATION COMMERCIAL REAL ESTATE HOW TO#
In this 7 minute video, I explain the cap rate and show you how to use it to determine the value of a commercial property. How to Calculate Commercial Real Estate Value (My Cap Rate Trick)Ĭommercial real estate is a valuable asset, and it’s important to understand how to calculate its value.
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